Uncertainty

Why do so many libertarians like insurance models, when they hate regulation and the precautionary state?

Insurance companies are at least as risk averse as public bureaucrats, and more minute judges of behaviour, since they have a direct interest. If we let insurance companies decide road speed limits, the man with a red flag walking in front of every motor vehicle would be back after 110 years’ retirement.

August 30th, 2009 |

25 comments to Uncertainty

I dunno Guy, you may be right, although if I had to guess I’d say that the insurance industry is itself heavily regulated, so no example of their current attitudes can be applied to a free market situation. Again, I could certainly be wrong. I wonder what someone who does know the insurance industry (Laird?) thinks.

In a free society, everyone would need to be insured up to their necks. It would be the only way of organising conflict resolution in a world of private Police and Law Courts. Why? Because in the absence of the notion of a crime being committed against the state, and the state apparatus then “punishing” the perpetrator, to the detriment of the victim, who then pays for the comfort and criminal training of his aggressor in prison through his taxes; we would have purely civil conflicts, judged and awarded against the perpetrator and in the sole interests of the victim or victims. Insurance would be fundamentally different in the absence of the putrefying effects of the cultural precautionary environment we now live in, fostered by the state and the Enemy Class that runs it.

Secondly, the insurance companies would not decide road speed limits; road operators would do this, guided by the supply and demand situation of the insurance market. Insurers would reward the safest road networks with lower premiums, and the other road operators would observe keenly the reasons for this and try to install similar systems on their own networks. It is possible that very little of this would be to do with speed limits as we know them.

The key difference is choice. The coercive state decides what you can and cannot do, and also how you can do it, just like the insurance companies. However, unlike the insurance companies, with whom a constant exit option, as well as thorough competition would exist, the coercive state gives no simple exit and allows no competition. Yes, you can leave the country, but in doing so you would be abandoning what is rightfully your property, and would have no choice. Pretty simple difference really.

Richard: In many instances they are not. For instance, in the UK you cannot legally drive on the roads without motor insurance covering liability to other parties. Once you have that sort of compulsion, you are inevitably going to get a lot of regulation.

A problem with insurance is that the incentives to commit fraud are high, both on the part of the insurer and the part of the insured. It is often in the financial interests of the insurer to deny claims and/or place or find loopholes in policies to prevent claims, even when the claims are reasonable. And it is can be in the interests of the insured to make fraudulent claims. Even in a purely private insurance market, it is necessary to have fair and inexpensive arbitration in which one party can contest the decisions of the other. If the state is involved in this and you have specialist courts and judges who deal with such matters, then you likely have regulation soon enough.

On the other hand, in a genuinely free market the two parties would choose one another (and the insurer would decide how much to charge) based on reputation. This would probably lead to “insurance ratings” resembling credit ratings, and things like past behaviour would become bigger factors, as would issues like where you live, your gender, your medical history, and all kinds of other factors that would make Guardian readers uncomfortable. Take this too far, and your insurance premiums will correlate highly with your insurance claims over time, and all we have done is add another layer of bureaucracy with a high incentive to constantly watch you and restrict how you behave. At least, this is the case except for insurance against very low probability events.

Of course, what this argument really proves is that in a free market insurance for high risk events is really only a form of saving. In such cases it may not be a good deal – there are other ways to save. Genuine “insurance” is only sensible when you are insuring against low probability, unpredictable events in which your own behaviour does not greatly influence the likelihood of the event.

For instance, most travel insurance policies carry insurance against damage to and loss of personal possessions. Getting an insurance company to pay a claim for such a loss can be difficult, as such losses are common and so are fraudulent claims. On the other hand, getting an insurance company to pay from a travel insurance policy for an emergency appendectomy that was necessary when you were abroad is trivial.

On the other hand, when insurance companies are selling travel insurance, they find that policies that cover loss of possessions are much easier to sell than bare bones medical only cover. This is because travelers can see likely events happening in a way that they can’t see unlikely events happening, and thing that this is what needs to be “insured” against, even though they take similar risks at home often.

No. Michael, what this argument “really proves” is that no human institution is perfect; that we have different, conflicting and sometimes perverse incentives; and that governmental controls do nothing to change this, but merely add yet another layer of human imperfection to an inherently flawed system.

Stephan is correct. The key difference is competition, and of course the essence of government is that it is a monopoly which brooks no competition. In the US we have numerous automobile insurance companies clamoring (via ubiquitous TV ads) for our business. Some compete on price, some on ease of obtaining the insurance (on-line purchase and immediate electronic proof of coverage), some focus on their speediness and quality of their claims process, others tout their personalized service.

The point is that each of us can choose which factor is most important to us, and purchase accordingly. We really can’t do that with government. If I don’t like the quality of my local government I have to physically change my place of residence; if I don’t like my auto insurance carrier I’m not required to sell my car.

Something to ponder is that self-insurance is a possibility in an insurance regime. This means, if one is productive enough or had ancestors that productive, one can escape the for profit insurance industry if they lose their collective minds and lower speed limits for their customers below reasonable limits. Escaping the state is not that easy.

This is no pipe dream but a legal reality in at least some US states. A trust fund with a value of $40,000 is sufficient for the purpose of legal compliance with auto insurance regulation in Indiana. Depositing the same value with the Indiana Treasurer or purchasing a qualifying bond is similarly acceptable.

Frankly, responsible kids get a raw deal from commercial insurance. Self-insurance seems a reasonable route even under the current regime.

Incidentally, if anyone happens to know of any good writing (or happens to have any ideas themselves) on private insurance in relation to disaster relief management, I’d be very grateful for any links or points in the right direction as it is an issue I’ve had some interest in for the past month.

Not true, Joshua! I am as wary of big business as I am of big government. I am a minarchic libertarian, in love with small sizes.
As for why we like voluntary insurance schemes, we’re aware that individuals cause accidents, and something like insurance seems like a good free-market solution to the problem of costs. Lloyds of London evolved naturally, in response to market forces. Whilst it is now tainted with over-exposure, it’s example in the past is one worth emulating.

Like all other businesses in a free market, insurance companies will exist only insofar as they offer a service which is useful to the customers, and therefore purchased by them.
The caricature of the risk averse insurers mentioned in the post is false.

Interesting how you adduce purely theoretical grounds, positing a hypothetical frictionless free-market world, for asserting that my characterisation of how insurers behave is false.

Perhaps you have had little to do with insurance companies, and don’t have a feel for their bureaucratic and highly risk-averse nature; but surely you do realize that drivers, companies who employ people, anyone dealing with a local authority, etc…(the list is almost endless) are compelled to buy insurance.

That is why I am not a doctrinaire, hard-core libertarian: I have no problem with requiring that motorists, motor-companies, etc., maintain some minimum level of insurance (or, as TMLutas pointed out earlier, have sufficient assets to responsibly self-insure). They are engaging in highly dangerous activities, and there must be a means of ensuring that anyone injured by those activities receive compensation for his injuries. In any just (libertarian) society people must bear the responsibility for the externalities of their actions, and human nature being what it is many “free riders” will try to avoid doing so. Mandatory liability insurance seems a reasonable compromise.

So what? There’s still competition among insurance companies to get their policies bought by the “compelled” buyers.

And the “compelled” market isn’t the only one that exists. In many fields (home insurance, life insurance, business insurance) people aren’t compelled to have insurance, but most do buy insurance, which means they get a useful service, by their judgment.
Insurance companies aren’t risk averse, to the contrary. Risk is their business, they manage it carefully. that shouldn’t be termed “averse”.

Guy, one final point- what’s your beef? Yes, insurance companies don’t like risk BUT neither does any other type of company! Everyone would prefer stability, if they can get it! So why are you picking on insurance companies, as though they are different?

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